Sunday, July 26, 2009

The Law of Unintended Consequences

4-Block World.Economic Principle from Frederic Bastiat: There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

There are also additional levels of unintended effects rarely discussed.

The beer drinker, by buying more beer, spends more personal income on beer than prior to the introduction of low calorie beer, and decreases the demand for other products. It shifts the resources of the economy to more beer production and away from other areas. More beer drinking also increases DUIs and alcohol related accidents.

Likewise, the rebound energy effect increases driving, but the data usually shows that the new total fuel costs are lower than before. The extra disposable income allows for new purchases, which may have more dire environmental and energy use consequences than gasoline. For example, buying a product or service whose production is highly dependent on coal produced electricity or oil, or has other bad environmental effects. The extra disposable income will increase demand for some additional product or service and the total effect in the economy on oil and energy use maybe higher after than before the introduction of the hybrid. The increase in miles driven also increases automobile accidents and road fatalities.

The useful and influential Kaya Identity (Equation) helps planners understand and analyze environmental effects of energy use by looking at an economy's total GDP energy efficiency and not individual components, like automobiles. Unfortunately, politicians tend to tend to take very short sighted and narrow views of their proposals.